Featuring:
Minmin Low, Bloomberg China Correspondent
Thomas Taw, Head of APAC Investment Strategy, BlackRock
Steve Sosnick, Chief Strategist at Interactive Brokers
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Bloomberg Audio Studios, Podcasts, radio news. This is the Bloomberg Daybreak Aisia podcast. I'm Doug Prisner. You can join Brian Curtis and myself for the stories making news and moving markets in the Apec region. You can subscribe to the show anywhere you get your podcast and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business app.
One of the stories we've been featuring this morning China and the European Union agreeing to start talks on electric vehicle tariffs and joining us now in our studios for more discussion on this is mid Min Low, Bloomberg China correspondent. So this is pretty interesting. We had these very high levees as high as forty eight percent on evs that have been slapped on Chinese cars going that direction, Minmn, and we had Germany's Vice Chancellor Robert Habeck there saying this is a first step, but it's a first step in an area where the wreknows steps before, so he's he's leaning optimistic, but then he says it will require many steps.
Tell us what you know?
Yeah, I would say it's been a lot of push and pull in this dynamic between German, Germany and China during the German minister's trip to China, because I mean, first of all, well, let's talk about that the EU China talks us. Then we'll go to the German ministers later. But the German the EU China talk. The Chinese Commerce Minister had a video conference call with his EU trade counterpart over on Saturday, and the EC spokesperson said that the talk was candid and substantive. He said that they will continue talks at all levels in the coming weeks, but that any negotiated outcome must address what he calls injurious subsidization. And again this is what the German ministers were in China. For the Vice Chancellor, there was very you know, he's been repeatedly emphasizing that these tariffs are not meant to be punitive in nature. It's meant to compensate for these unfair advantages that China's ev makers get.
It seems like, I mean, I get the subsidy angle, but the fact remains that China at this point seems to have a lot of excess capacity in a number of industries, and lower cost products are being exported to countries let's say in the European Union, which directly threatening Brian mentioned Germany. The automobile industry in Germany, right, that's right.
So Germany is the largest automaker in China, and we know that over the past five years, in fact, China's imports of German cars had nearly halved as their domestic makers really you know, pick up market share in the domestic market. And yes, you're right, there has been this build up of overcapacity, which is why the overseas market is really important for China because that's where these ev makers get higher profit margin, and now they're being squeezed when it comes to profits with these huge terriers that are being slept on China. But some analysts are saying that maybe the final outcome is not about you know, just removing these tariffs altogether, but eventually to get perhaps some Chinese companies to invest in Europe, to pay European wages to European workers, that could perhaps you know, lesson that kind of cost advantage that Chinese makers get and also reduce the threat of taking away jobs from Europeans.
So there is room for negotiation. There's a lot of scope here to find ways to try to make it work because obviously the two sides feel as though they want and need each other. But it's interesting that there's no timetable on this. Is that just you know, just a technical thing and it'll get worked out well.
So we're about one and a half weeks away from July fourth, which is when the provisional terrorists will take effect, so it's highly unlikely that any outcome will come out before that. But again, this July fourth tariffs are provisional. The finer tariff reads will be decided in November. It has to be backed by the majority of EU members, so China has this window until November to convince the majority of EU members it needs to. In fact, it requires EU members support that represents sixty five percent of the EU population. So China has been very strategic here because the top foremost populous countries are France, Germany, Italy and Spain. So when you look at their terriffs, their investigations into these empty dumping you know areas. They have looked at pork, which targets Spain, They've looked at brandy, which targets France. They've hinted at twenty five percent tariffs at vehicles with large engines, which really targets Germany and Italy because Italy sells these luxury sports cars. You're Ferraris Lamborghinis to China as well. So very strategic here.
I'm wondering whether or not we need to recognize the political winds in Europe and how they seem to be shifting and the risk that we get perhaps no compromise, that there is a firm line drawn and it results in some type of trade war.
Yeah, that risk is getting higher with the EU elections and you see the rights of these right leaning parties getting into the parliament. And again, as I said, we saw very mixed signals coming out of the German minister's trip to China, because you would expect someone of the vice chancellor's rank to meet with someone of a similar rank in China, and that would be premierly to Young, who is the number two men in China. But that meeting didn't happen. Habak himself said that he didn't know why that didn't work out, but he got to meet with other Chinese officials though, including the Commerce Minister, the head of the NDRC, which is China's macroeconomic planner. And again, as I said, that push pull dynamic, where you have Chinese, the Chinese side saying, yes, we're willing to get Chinese companies to tap the German market. But Germany, you have to step up your leadership here and get the EU to quote correct it's wrong. And then you have the German Vice Chancellor also managing expectations, saying that this conflict will not be resolved in his trip here and he cannot negotiate on behalf of the EU as well.
So many philosophical differences between the two sides. You wonder how much can actually be agreed to. Miend men out of time unfortunately, but thank you for coming into our studios. Midmen Low Bloomberg, China correspondent looking more closely here at China and the European Union, and I guess a little bit of faith here agreeing to start talks on EVY tariffs. Thomas Tadd joins us in our studios at a APAC investment strategy at Blackrock. Thomas, thanks very much for traversing the traffic and coming into our studios with us. We do appreciate it. So it seems like most people, a lot of people are basically long US equity, we seem like we might be seeing a little bit of a selloff here in some of the big momentum plays, particularly AI. But one of the things that this market has shown us of late is that it has been absorbing some of these hits. I've been able to let some of the gas out without having the broader market go into a really big downturn. We had a little bit, maybe five and a half percent down run in April. In any case, if one is looking to diversify here, are there ways to do it? Or would you switch out of US equities and find an overweight elsewhere?
Yeah, morning, I guess I have no excuse to traverse because our offices are about.
Twenty meters away from each other.
But yeah, in terms of the US equity market rally, time for a breather. It looks like when you talk about broader market, small cap, some of the laggard sectors utilities, financials, energy, I mean, it's it's obviously important to note that we have not seen anywhere near the rally that we've seen in large mega mega cap tech, tech and quality, and so you know, there's a couple of different scenarios here. One is the underlying data in the US starts to deteriorate a little bit. We're seeing a little bit of that on the margin in terms of housing, housing starts, consumer retail numbers, et cetera. Or the US economy continues to power on and we start to see a broadening out of the US equity rally. So either way, I think, you know, now is probably a good time to look at diversification and broadening out into some sectors. I think most investors will be doing that through kind of a factor lens, so continuing to look at quality type of companies with strong balance sheets, and then other investors will look at sector rotations. And as I mentioned that the sectors before are the ones that I think most investors are looking at, financials, energy, utilities, consumer staples to some extent. And then globally, you know, investors are are still looking at really Japan and India. I know there's a lot of debate about both of those markets and the valuations there and the boj and central banks.
Et cetera.
But and then also em X China has been a huge, huge beneficiary of the em trade, and how investors tactically rotate around China is going to be interesting to watch US.
So you sketched out two different scenarios very briefly in terms of where the US might be headed. Do you have a degree of confidence in the tie in one particularly well?
I think you know, the underlying economy is certainly one thing. I think investors tend to underestimate how long it takes for higher rates to trickle down into the underlying economy and for consumers to actually be able to grasp that and essentially stop or slow down in spending. And then the other thing to mention is, you know, in terms of the earnings growth, you know clearly that's been very very strong for a megacap. If you look at the valuations, they haven't risen that much, but there is a huge there's a huge emphasis on forward looking valuations. And you know, whether some of those megacap names can continue to grow at the significant rates that they have been growing, that I'm not so sure of. So I think there is a little bit of a more defensive tilt. And let's not forget obviously we are going into US election cycle pretty soon, so I think investors are looking at maybe rotation, maybe taking some profit here.
So you're looking at Asia Pacific Investment Strategy. I wanted to ask you about Japan because you're right. We did run a story over the weekend. It said that foreign investors are lightning up on Japan. They're starting to worry about the weakness in the end, and they're also worried about whether or not that has an impact on the economy. A couple of a couple of houses mentioned did not include you. In fact, you were one of the examples of how you're sticking with the Japan story.
Why yeah, well, I think you know, versus some of maybe some of the investment banks analysts, we're much more longer term strategic asset allocation, and so, you know, I think it's also important to clarify. A couple of months ago, we did this big piece on spotlight on Japan and how investors can play that, and the story hasn't really changed much. So one of the things we said was, in terms of the broader index rally that we've been seeing over the last year year and a half, that first leg of the structurable market could be coming to an end. And that basically means, you know, the way that investors move into Japan using just broad index funds to get any kind of exposure in n K two two five topics, et cetera. That structural leg of the bullmarket, Phase one was kind of coming to an end, and now I think we're in a period of relative calm, trading range investors trying to digest what the boj are going to do and what the impact of rates are going to be, etc.
Etc.
And I think phase two and again this hasn't really changed, but investors need to be a little bit more tactical and granular on Japan because not everything is going to keep going up like it has been going up, so looking at active funds, value funds, high dividend type of exposures. And also the final thing on Japan is, you know, I think it makes a lot of sense for investors to close underweights there because you know, even if it doesn't continue to go up as it has been going up, it offers diversification because it's a value driven market and investors have so much growth in their portfolio at the moment.
Given the enthusiasm that has finally taken hold domestically, I'm wondering if this market to get rattled in a significant way, how SENDEMA just is undermined to such a degree that there's really a big setback as a result in terms of psychology. Yeah, well, I.
Mean, let's not forget that. You know, retail investors have not really participated that much in the equity, the Japanese equity rally over the last couple of years. You know, we're still seeing around seven trillion US dollars sitting on the sidelines. Yes, there has been more participation in programs like NISSA, but it's quite marginal. Inflation is going up, you know that there is There are some areas where investors are concerned that maybe it's not going up like the boj would like it to go up. But you know, the equity market has rally, inflation is going up, and you have these programs that are incentivizing investors to move into equity market. So I think that's really just starting, and I think the domestic investors will be part of that, if not the majority of that second leg of the structural bull market.
There all right, Thomas, out of time, unfortunately, Thank you very much for joining us here in our studios. Thomas Ta, Head of APAC Investment Strategy at black Rock. Steve Sosnik, chief strategist at Interactive Brokers, Steve, thank you for joining us on an early Monday morning in Asia, late Sunday for you in the United States. We can talk a little bit about how the triple which didn't seem to deliver as much volatility as we thought. But I thought maybe first we could go to as I mentioned a few moments to GOO, Japan's currency chief Masato Conda, threatening to intervene in the market. We have seen quite steady and quite fast weakening in the Jena late A warning like this, does it make a difference?
Hi, Brian, good morning to you. Thanks for having me. Yeah, it does make a difference. You know. I think one of the aspects when foreign and when international investors are allocating their money is the currency ability or the currency outlook for a given country. And in Japan, you know, it's tricky. You either have to you either have to consider whether you want to hedge the currency because it's an interesting problem, right because you know, stocks tend to go up when a currency weakens, but your holdings don't seem to improve if if the currency balance is balancing it out by weakening. So you've got this this issue going on, and you know, instability is another word for volatility, and that does put investors a little bit on the on their heels when it comes to making international allocations.
Hey, Steve, how much of this is really a story about a strong dollar? I mean a dollar that has been so supreme it's not even funny.
Well, Doug, I think some and some and I think, you know, across the scope of global currencies, it is more of a strong dollar issue. You know, remember of course that that this is one of the times where the feed is actually a bit behind its peers, where we had other central banks, uh, you know, cutting before the US did, and so so that you know, that interest rate differential, at least even the perceived interest rate differential that that might persist, is definitely strengthening the dollar. Although that said, the Japan and the end have their own unique set of circumstances, you know, regarding yield curve control and all the other stuff you've been reporting on.
So let's go back to US equities because that's very much in focus as well, particularly the high flyers, and video was slammed pretty good at the end of last week. Of course, it's had you know, remarkable gains all year long. I'm curious whether or not you think that that's something that will continue here. And I want to draw comparison because when people were buying Amazon back in the days when it had no earnings, it was because of the potential, and it was because of perhaps a little bit of hope. The same thing with Tesla. But with Nvidia you actually have earnings. So it's it's a little bit trickier to to try to value the stock when it's it's out of sync. The companies growing faster than what it is predicting and what analysts are predicting. Does that add up to volatility going forward?
For you, Steve in theory, it should, you know, because anytime again, you know, any sort of uncertainty does create volatility. You know, we were actually, in this case, fairly certain that this is we I mean collectively, you know, the investors as a whole seemed pretty collectively certain that this was a company that could continue to beat beat on the top line, beat on the bottom line, raise their estimates, beat the raised estimate, keep doing it and do it over and over and over again. That's why the stock has had this remarkable run. But at some point you have to figure what are the limits to all this? How much more you know, how much more AI adoption will there be? You guys just reported on you know, on cutter in the Middle East, so there's some more doing it. But you know, bear in mind that Mark Zuckerberg at the last conference call basically said it was going to take potentially years for the billions of dollars that they're spending on AI pay off on their bottom line. And so you do have to run into the situation of, Okay, we've got all this AI. You know, we're building all this AI potential. I'm going to stipulate, let's say it is that is the wave of the future, because with Amazon's case, the Internet was everything that was promised and then some. But you know, how what if this doesn't necessarily pan out as quickly as possible, is there a bit of a hangover? And if so, how that is a go? And the other part being we've become so dependent upon Nvidia and these few market leading stocks. What happens if this pullback persists. Obviously, if that does persist in a major way, it's probably something really not good for the markets.
So a moment ago, Steve Brian mentioned the fact that we did have that triple witching in the States on Friday, the expiration of options and futures on equities and stock indicies I think about five and a half trillion and notional value, which is in and of itself staggering. What did we learn from the price action Friday?
I think what we learned from the price action, or or sort of the lack thereof, was two things. First of all, we were expecting a bit more price action in Apple and Nvidia and Vida. Actually the positive side, because the rebalance of the xl K ETF, it's about an eighty billion dollar ETF. It needed to buy about ten billion dollars of Nvidia and sell a similar amount of Apple. I won't get into the details of why. It's kind of a weird mechanics of the ETF itself, but neither one moved all that much. So it tells you the market was pretty good at absorbing that. And secondly, it's telling you that we've got all these funds that mechanically sell volatility to some extent, they've been under performers because really, when the market goes straight up, you know, you don't necessarily want to be writing calls you'd rather just hold onto things. But as a result, it means that a lot of the active hedges, the market makers and the professionals who delta hedge, end up long that volatility, and as we get close to expiration, it kind of puts a It kind of puts a magnet on expiring strikes rather than sort of providing a slingshot effect, Which is why we sort of find the volatility dampening a lot of times on these major explorations, whereas they used to kind of expand a bit on these major explorations.
You're so good at explaining things, Steve explained to our audience, how even with all of these huge gains from companies like Eli, Lilly and Broadcommon and Video, that realized volatility just isn't that great at tomorrow. If you look at the vics at thirteen, it suggests that you know that there's almost complacency there. And yet it should be a time, shouldn't it that we have a ton of volatility.
It should be because part of it is we're getting a bit of dispersion of results, actually quite a bit of it, because this is kind of the problem with the narrow leadership is the moves are sort of being dampened out. You don't have much participation at all, you know, from the vast majority of stocks that are trading. But yet you've got this cadra of market leaders, you know, among the ones that you've mentioned, that are just propelling the market higher. So that's sort of you know, if you if you thought about having a two stock index and stock A goes up by five percent and stock D goes down by five percent, well then your net move is zero to expand that and scale a little bit. And when you think about market capitalization weighted indices, you know, the big ones can outweigh, can outwigh all the smaller ones. But that's kind of why we're dampening volatility. And VIX reflects the historical volatility, but I've always asserted that it also it also represents institutional demand for hedging. Our institutions buying VIX and VIX related products because it's really the easiest way to hedge a portfolio, and quite frankly, they're not. This is this is what I used to say when I was market making, you know, was you know, we're selling umbrellas here, and nobody wants to buy them. When there's a drought. That's kind of what's going on in terms of VIX.
The fact that we were so heavy in volume Friday is that is that a bullish sign to you? Sixty percent above the average for the past month and the S and P very quickly.
Steve, No, that's just expiration. When all those options expire, you're going to get bought and you have rebalancing that volume.
Follows from Matt Okay, all right, all right, Steve, we'll let you go back to the barbecue. Have one on us. Thanks very much for joining us on Sunday. Steve Saznik, Chief strategist at Interactive Brokers.
This has been the Bloomberg Daybreak Asia podcast, bringing you the stories making news and moving markets in the Asia Pacific. Visit the Bloomberg Podcast channel on YouTube to get more episodes of this and other shows from Bloomberg. Subscribe to the podcast on Apple, Spotify or anywhere else you listen, and always on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.